Research

Research


Current Projects


A Structural Investigation of Quantitative Easing (joint with Gregor Boehl)


Did the quantitative easing measures (QE) conducted by the Fed during the Great Recession induce real effects? We seek to answer this question by estimating and filtering a medium scale DSGE model featuring a banking sector, financial frictions and the zero lower bound (ZLB), which we model as endogenously binding.

Using the smoothed series for counterfactual analysis we conclude that from 2009 to 2015 the overall QE measures contributed about 0.5 percent of output. While the effects of the liquidity provision was negligible, both the bond and MBS purchases had positive impact on consumption. Other than MBS purchases, Bond purchases had negative effect on investment and a negative net contribution to GDP. While QE stimulates asset prices in the short-run, the long-lived reduction of excess spreads lowers bank's net worth, the loan supply, and hence real economic activity in the mid-run. Forecasts suggest that, through the link between banks balance sheet and investment, shutting down the QE program will have a strong recessionary "hangover" effect, leading to a negative net-effect on output in the years after the end of QE.


Keywords: Quantitative Easing, Liquidity Facilities, Zero Lower Bound, Nonlinear Estimation, Zero Lower Bound, Great Recession

JEL Classifications: E63, C63, E58, E32, C62


Current version: here





The Great Recession and the Zero Lower Bound (joint with Gregor Boehl)


We investigate the drivers of the Great Recession and analyse the effects of interest rate policies in the aftermath of the crisis. For that purpose we estimate a medium-scale DSGE model and use it to decompose the dynamics of the US economy while accounting for an endogenously binding effective lower bound on nominal interest rates (ELB). We find that the Great Recession was caused by an increase in the risk premium, which persisted after the trough and weighed heavily on real activity. Our analysis suggests that the long duration of the effective lower bound was a reaction to the weak economic development as opposed to a commitment by the central bank to actively keep interest rates low. Nonetheless, the sharp cut in the Federal funds rate prior to the ELB period attenuated the fall in output by roughly 1 percent. At the ELB, expansionary forward guidance shocks had a strengthening effect on output and helped to stabilize inflation although the Phillips Curve was rather flat in the last two decades. The cost of the binding ELB was substantial and its presence lowered output by 1.5 percent.



Keywords: Zero Lower Bound, Great Recession, Bayesian Estimation, Nonlinear Estimation, Forward Guidance

JEL Classifications: E63, C63, E58, E32, C62


Current version: here




Working Paper


The government spending multiplier, fiscal stress and the Zero Lower Bound


(R&R at the Journal of Economic Dynamics and Control)


The recent sovereign debt crisis in the Eurozone was characterized by a monetary policy,

which has been constrained by the zero lower bound (ZLB) on nominal interest rates, and

several countries, which faced high risk spreads on their sovereign bonds. How is the government spending multiplier affected by such an economic environment?While prominent results in the academic literature point to high government spending multipliers at the ZLB, higher public indebtedness is often associated with small government spending multipliers. I develop a DSGE model with leverage constrained banks that captures both features of this economic environment, the ZLB and fiscal stress. In this model, I analyze the effects of government spending shocks. I find that not only are multipliers large at the ZLB, the presence of fiscal stress can even increase their size. For longer durations of the ZLB,multipliers in this model can be considerably larger than one.


Keywords: government spending multiplier, zero lower bound , financial frictions

JEL Classifications: E32, E 44, E62, H30, H60


Current version: here



The government spending multiplier, fiscal stress and risk


According to a growing empirical literature the government spending multiplier appears to be relatively small in times of fiscal stress. I employ a medium-scale DSGE model with leverage constrained banks and sovereign default risk to analyze how the presence of fiscal stress  can affect the transmission of government spending shocks. I find that the role of fiscal stress for the size of the government spending multiplier is negligible when analyzing the linearized economy.


Keywords: government spending multiplier, fiscal stress , financial frictions

JEL Classifications: E32, E 44, E62, H30, H60




Fiscal Retrenchment and Sovereign Risk (BDPEMS Working Paper Series WP_2015-07)


How does sovereign risk affect the dynamic consequences of identified contractionary government spending shocks? I apply a regime-switching SVAR on Italian data and find that in periods in which government bond yield spreads are high, cumulative government spending multipliers are smaller than in the calm regime. This empirical finding supports theoretical arguments that associate fiscal distress with low multipliers (e.g. Corsetti et al. (2013), Economic Journal). An additional result is that in the crisis regime, risk spreads increase after contractionary government spending shocks. This challenges the suggestion that declining risk premia are the reason for the attenuated output response in the crisis regime.


Keywords: government spending multiplier, sovereign risk, fiscal retrenchment, state-dependent multipliers

JEL Classification: E32, E62, E63, H60


Current version: here

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